Leases can be terminated either contractually, if there are express termination provisions in the lease, or by law. Here we look at the typical contractual terms that may allow a party to terminate a lease. Note that it is not advised to contractually terminate a lease without first considering the law.
Contractual terminations
a. Break options
The most obvious one is a break clause. Such a clause will specify who can terminate, when they can terminate and on what conditions. For a tenant, it is normal that at the time of serving a notice to break the tenant is not in rental arrears and has not committed a breach of the tenant’s covenants.
A break fee may be payable to the landlord. On the actual termination date, the property may need to be returned in a certain way and delivered with vacant possession. If any of the conditions have not been met, a landlord may prevent the tenant from exiting the lease.
A right of forfeiture gives the landlord a right of re-entry following a breach of a condition by the tenant. For example, if rent has not been paid within 21 days from its due date, then as long as there is no additional period to allow the tenant to pay the arrears, the landlord could automatically terminate the lease.
A landlord’s break option will be more straightforward and less conditional. In this case, a landlord may break the lease on giving the tenant a six-month prior notice. Short-term leases are unlikely to have such break options.
b. Forfeiture
A right of forfeiture gives the landlord a right of re-entry following a breach of a condition by the tenant. For example, if rent has not been paid within 21 days from its due date, then as long as there is no additional period to allow the tenant to pay the arrears, the landlord could automatically terminate the lease. Rights of forfeiture can also be triggered when a tenant is in breach of the tenant’s covenants, e.g. an obligation such as to repair or remedy a default.
c. Insolvency
Insolvency, which would be a defined term, is usually where a tenant is unable or deemed unable to pay debt; where steps are taken to obtain possession of the leased premises; where assets of the tenant are or will be subject to receivership; or where steps are taken by any person to wind up the tenant. Insolvency is normally an automatic trigger to terminate the lease without a right for the tenant to remedy the default.
d. Long stop date
Failing to open the premises by a long stop date, e.g. a final date whereby the tenant must complete works and open the premises for trade, can cause frustrations. A landlord may be unwilling to extend the long stop date and may use the lapse of this date to terminate the lease agreement.
e. Damage or destruction
A property that is destroyed or damaged by an insurable risk, such as fire or water damage, malicious damage and so on, may allow either party to terminate the lease. The exact conditionality of this depends on what the parties agree, but it usually provides for a right where the landlord can elect to terminate at will, or where the landlord elects to reinstate but then fails to do so, allowing either party to terminate.
All lease terms will be subject to the law and so it may be insufficient to terminate the lease based on a contractual term of the lease without considering the law.
Jazz Moman is director and head of real estate and hotels at law firm DWF. The views expressed here are his own.
